0 Bewertungen0% fanden dieses Dokument nützlich (0 Abstimmungen)
31 Ansichten15 Seiten
This document discusses executive compensation for boards of directors and CEOs in India. It notes that current compensation may not be just given the responsibilities and accountability of these roles. The objectives are to examine whether boards and executives receive a fair rate of return relative to their efforts and if corporate governance policies adequately value their contributions. The analysis presents views that compensation could be reformed to better link pay to ensuring shareholders receive a fair dividend. Overall, the document analyzes if boards and CEOs are fairly compensated under current corporate governance systems in India.
This document discusses executive compensation for boards of directors and CEOs in India. It notes that current compensation may not be just given the responsibilities and accountability of these roles. The objectives are to examine whether boards and executives receive a fair rate of return relative to their efforts and if corporate governance policies adequately value their contributions. The analysis presents views that compensation could be reformed to better link pay to ensuring shareholders receive a fair dividend. Overall, the document analyzes if boards and CEOs are fairly compensated under current corporate governance systems in India.
This document discusses executive compensation for boards of directors and CEOs in India. It notes that current compensation may not be just given the responsibilities and accountability of these roles. The objectives are to examine whether boards and executives receive a fair rate of return relative to their efforts and if corporate governance policies adequately value their contributions. The analysis presents views that compensation could be reformed to better link pay to ensuring shareholders receive a fair dividend. Overall, the document analyzes if boards and CEOs are fairly compensated under current corporate governance systems in India.
A study on Executive compensation By Dr Cherukupalli Usha Rani Consultant (Finance and HR)
and Mr. Shaik Masood Asst. Professor of Finance & NCCMP Coordinator SEBI Resource Person Alluri Institute of Management Sciences masoodfru@gmail.com
Page 2 of 15
Abstract: Are we doing really justice to Board of Directors, CEOs and other Executives with the pay package fixed in India? No. Not at all. People interpret board of directors, as if they act against the rights of the shareholders. So there is a need for a good Corporate Governance to protect the rights of the shareholders from oppression and mismanagement by board of directors and CEOs of the company. They also think that corporate governance is framed in favour of employees, suppliers, and community. Public project board of directors and CEOs as they manage company to show their power and prestige. Our objective behind writing this paper is how in fact both board of directors and shareholders work together with an expectation, to earn a fair rate of return for their investments. If every individual in every organization follows ethics and morals shareholders will invest their money so that organizations can maximize profits with such large amount of share capital. Head of every division is held responsible for the capital employed and its cost as well as value of rate of return. Cash flow is deducted from the profits on the basis of ROE. Every division should work for the optimum utilization of capital employed. In another way it is an internal competition. Shareholders sometimes invest in companies even if rate of dividend is less than the bank interest. But why?
Board of Directors: They are held responsible and accountable individually and with all other board members for any ultra vires action against the corporate governance. And they are answerable and accountable to shareholders and to general public. Board is held responsible for the success and failure of the company. In fact board will work for the growth of the company and they serve for the company with the help of experts such as CEOs and other executives. But ultimately board take the responsibility on behalf of shareholders. In olden days any business was run by shareholders and directors because they all belong to same family. Later it has taken a different shape so appointment of directors by shareholders on the basis of rotation system has been implemented under the umbrella of Corporate Governance. Shareholders appoint the directors in annual general meeting (by rotation) (U/S 166) held at the end of every year , who in turn appoint CEOs and other managerial personnel from whom shareholders expect fair rate of return for their investments which attracts some other new investors for the growth of the company. Ownership and control have been separated. Directors are also shareholders of the company which shows their interest towards the returns on investments made by them.
Corporate Governance: In general corporate governance seems to be a document which directs an ethical code of conduct, whoever deals with the company. But sometimes it levies boundaries for directors and CEOs of the company for their boundary less services who devote their life for the growth of the company. And their returns in terms of qualitative and quantitative way are not at all sufficient in relation with their pay package due to regulations in corporate governance. Efforts and services of BOD, CEOs and other executives may not be valued in accordance with their accountability, responsibility, and commitment.
Objectives of the study: Our experience with Country Club private limited, Bharti Axa life insurance forced me to state this point that every director of the company should have direct communication channel either on phone or an email facility with the shareholder and customer. Now a days this job is given to customer care, call centres who work with half knowledge and vested interest. We feel there is a gap between ownership and control. Of course there are some companies who responds immediately say for example Infosys, Wipro, BEL, ISRO, Aditya Birla, Just dial, and Butterfly, along with below stated companies who work with lot of commitment, accountability and responsibility. Such companys directors, CEOs and other executives deserve for a pay which we cannot value in terms of qualitative and quantitative measures.
Scope of the study: Our study is limited to companies specified in the paper. It doesnt mean that BODs and CEOs of other companies are getting fair returns. In our next paper we try to extend our research work relating to issues raised in market.
Analysis and Findings: Problems of Board of Directors, CEOs and other Executives: General public have a wrong notion that one of the peculiar characters of company form of organization is limited liability. To some extent Directors, CEOs and other executives liability may be covered by insurance schemes of corporations but the degree of risk taken by the Directors, CEOs on the grounds of criminal and other offences and loss of their health condition due to stress at work place may continue even after their resignation for the post of director. In case of fraud and fraudulent representation outside directors such as Independent directors are also held liable for ultra vires actions made (without their notice) inside the company against Memorandum and Articles of company. In this context to support our view we would like to mention a few problems for justification. The volume of compensation they
Page 4 of 15
receive in terms of money and other emoluments.
A few examples below stated are the views expressed by external and internal people.
External Views:
Example 1: If companies can give the minimum guarantee rather than going for investments in real estates or any other investments shareholders may invest in companies so that with huge investments companies can grow. Based on the trend of investments by shareholders structure of capital in memorandum of association and articles as well as company law also can be amended for the sake of economic profits. And moreover fancy rates of real estates also comes down when public invest in companies. This is indirectly, changes in corporate governance providing shelter to public through which we can avoid unemployment problems and can help to the people below poverty line. . Returns from the capital employed in the business operations are greater than the cost of that capital. For all the above development every individual in nation should follow ethics. Every individual facing problem in this world to earn more and more money. So to maximise the wealth they approach some in right way and a few in a different way. Example 2: May be 30 years back when I went to witness an Annual General Meeting of a Hotel company as a shareholder, one of the person from among shareholders asked a question to Director Sir I came from Mumbai (Bombay) and one of my friend (our shareholder also) requested me to get answer for his question that next year he is going to perform his daughters marriage for which company may give guarantee for minimum rate dividend. In response to that question director laughed and said they will try for that. And in next AGM, because it is a hotel company except lunch on the day AGM held company has not declared any dividend to equity share holders. In those days people were happy because a few of the shareholders cannot effort food in a five star hotel in normal days who invested their money in that hotel company. Later on that company has become only VIPs hotel. Whose money has been spent for whom? Whose mistake? Definitely it is due to loop holes in corporate governance. During any year if company is unable to pay minimum rate of dividend to equity shareholders such companies must be closed. The rule of perpetual succession need to be altered and amended. Internal views Example 3: Let us try to redesign our corporate governance to obtain economic profits rather than accounting profit. The difference here is shareholders should get a fair return of dividend (irrespective of economic irregularities) which is known as economic profit. We have an opportunity to declare dividend in the following ways. Calculation of fair return A By reducing salaries paid to CEOs of such companies who fails to pay fair rate of dividend. B Reduction of PRP (Performance related Pay) below 3% of profit and 10% of Incremental profit. C By fixing the maximum limit in number of directors in Board
Page 5 of 15
D Reduction in number of directorships below 12 or 15. (Including internal directors) Example 4: Thinking outside the box has become ultra vires action which has not been covered under any corporate governance. Example: Due to companies transfer policy and promotion policy, majority of the employees were away from their families and provision of company accommodation for such employees and untimely change of rule before transfer and after transfer disturbed a lot. If, any organization implement thinking outside the box on experimental basis voice of a few sufferers is to be valued and if possible rectified. It should not be a punishment transfer of promotion. Example 5: Corporate governance as well as articles of association needs to be included standing principles regarding promotions and transfers. In addition to performance based promotions at least 40% promotions shall be made on the basis of seniority. Knowledge of senior people should not go waste which is an intangible asset for any organization. Example: An executive from a top company has been ignored to promote for higher post that has completed his post- graduation from a premier institute and such post has been filled with a person who has completed his graduation from an ordinary engineering college. Let us alter our corporate governance by giving importance to highly qualified persons from top ranked intuitions. An underground dada may or may not require the services of a highly qualified person but organizations at higher level require services of a highly qualified person. Example 6: Why an executive entered into office premises early morning at 4.30 am? May be he has some important work for which he came on that day. Next day again a discussion on the same issue among employees in connection with the entry of an executive at 4.30 am and following day records have been changed about his arrival time. But why? Is it a rumour or real? If it is true solve the problem from the roots. If it is a rumour find out what was the intention behind that rumour? And acting accordingly on time is important. If it happened really, concerned director or CEO has to convene a board meeting. Here board has to face a problem such as if they publicize this issue through public meeting, or through media in case of theft of financial fraud issue of removal orders of that particular executive, gives meaning in different way and takes a different shape. Ultimately it reflects in share value in market. Example 7: We can quote another example why an executive committed suicide may be due to work pressure or personal problems? A director or a CEO has to solve such problems. Example 8: Companies transfer policy and promotion policy. Salary and other benefits Boards constantly face such problems. While some of these are unique to one specific board, others are common from one board to another.
Page 6 of 15
Example 9: Meetings and resolutions: Directors are accountable in a general meeting to equity shareholders which may or may not be possible to solve at AGM. Sometimes discussions may not go as per agenda. Director sometimes has to convince shareholders who were absent for any previous meeting and may not be satisfied with the rate dividend declared by board. Settling issues between shareholders and other board members tactfully is a challenging job for concerned directors. Sometimes he has to advise the specific member of board to speak out the issue raised in board meeting. Delegation of authority in absence of chairman is another job a director has to execute. Director must be aware of various decision making techniques. An unresolved issue may be raised by concerned director for resolution and some require a special notice. Example 10: Estimations of future risk and measuring cost of risk is a challenging job for any company. In recent years it was laid down that before retirement any employee approach court for any justice their pension may be blocked until the matter is settled in court. We know the functioning of judiciary. In such a case union may raise many disturbances and an unpleasant atmosphere. Example 11: Recently an issue raised by employees of an IT company regarding leave on Election Day. Different states have different poling date. Sometimes people from faraway places may not be able to come back within one day after election. NOTE: All the examples given in our paper are not related to the companies specified in our paper. Some internal problems such as fines imposed on employees, termination of an employee, bad behaviour of workers within the company and outside the company, absence from duties, cost of turnover of employees, performance appraisal and performance management systems, feedback systems, recognising key performance areas, employee minimum wages, compensation rules as per the act, health, safety and welfare measures as per the factories act, complaints received from outsiders, grievance procedures, high rate of attrition if any, dealing with contract and casual labourers, travel rules, leave without pay, stealing and threat are some of the internal problems though related to HR but directors have to frame a good governance based on ethics, morals and values reflecting in the vision and mission of the company. If companies cannot solve the above issues raised by union indirectly it affects the market price of shares. General problems. Strategies focused on short-term returns, Long-term strategies. Governance issues and shareholder scrutiny Executive compensation,
Page 7 of 15
Shareholder litigations Risk management, Tax strategies, Changes in audit rules, Messaging to shareholders and the market, Board decision-making processes. Demand the attention of many boards. Responding to shareholder activism; proxy advisory firms; Compensation plans and awards, accounting requirements; Managing board communications and processes
Engineers by Mike Volker Website: http://www.sfu.ca/~mvolker/biz/bod.htm
Investors/shareholders are interested regarding dividend payable by the company and its performance in earnings. We have two methods to measure corporate performance 1. Dividend rate 2. Earnings performance. Formula for Dividend Rate and Earnings performance 1 Pay-out ratio=cash dividend declared on common stock/Net Income 2 Return on common shareholders equity ratio=Net Income Preferred stock Dividends/Average common shareholders equity If Pay-out ratio increases (compared to last year) return on Investment decreases. And vice versa.
Page 8 of 15
Financial performance in view of shareholders return
D/P: Dividend pay-out ratio in percentage (%) Mps (Rs in crores): Market price per share as on 11th April, 2014 ROE: Return on equity in percentage % (Average of open and closing market price per share for that year) Estimated ROE for 2014 and 2015 calculated on the basis of trend values (Y c =a+bX) equation of straight line trend a = Sum total earnings(Y) divided by Total Number of years (N): b = sum total of earnings multiplied with deviations (XY) divided by sum total of square of deviations (X2)(deviations from year (2011) square of deviations taken) Contd. year Company name Bharathi airtel Torrent power Gujarat fluro chemica Ambuja Cements Larsen and toubro Reliance Industries D/P (%) ROE( %) Mps D/P (%) ROE( %) Mps D/P (%) ROE( %) Mps D/P (%) ROE( %) Mps D/P (%) ROE( %) Mps D/P (%) ROE( %) Mps 2009 4.90 28.01 533 23.17 12.61 193.8 9.65 15.96 102.3 26.87 26.71 100.5 17.66 27.94 1255 12.39 12.11 1440 2010 4.03 25.66 656 16.94 21.12 277.2 11.30 27.64 262.9 51.13 17.31 134.2 17.20 23.89 1633 12.84 11.84 1041 2011 4.92 17.49 359 24.38 22.26 224.5 11.51 21.86 440.5 39.67 18.43 165.2 22.31 18.12 867 11.76 13.39 867 2012 6.63 11.59 301 24.82 21.53 171 14.58 15.09 379.9 53.08 14.37 162.5 22.67 17.67 1296 12.63 12.07 759 2013 7.45 9.41 318 24.55 6.32 118.1 8.91 20.15 308.7 51.40 14.00 194.4 23.18 16.85 1392 12.51 11.67 859 2014 -- 3.05 322 -- 13.12 106.2 -- 18.89 303.2 -- 9.66 217.2 -- 13.13 1298 -- 12.11 953 2015 -- -2.07 -- -- 11.90 -- -- 18.47 -- -- 6.82 -- -- 9.21 -- -- 12.07 --
Page 9 of 15
D/P: Dividend pay-out ratio in percentage (%) Mps (Rs in crores): Market price per share as on 11 th April, 2014 ROE: Return on equity in percentage % (Average of open and closing market price per share for that year) ROE for 2014 and 2015 calculated on the basis of trend values (Y c =a+bX) a = Sum total earnings(Y) divided by Total Number of years (N): b = sum total of earnings multiplied with deviations (XY) divided by sum total of square of deviations (X2)(deviations from year (2011) square of deviations taken) Interpretation From the above table of twelve sample companies pay-out ratio of return on equity and market price of the share, it can analysed that few follow a stable dividend policy in terms of pay-out ratio whose return on equity was also stable, where as if the pay-out ratio increases and return on equity declines or vice versa, we can say that the company has sufficient new investment opportunities which can be used as internal equity to increase the return on equity, otherwise it is better to distribute the profit to keep shareholders happy. Hence it can be concluded that corporate performance can directly influence how policy makers take care of their shareholders wealth to keep stable growth in their market price. Suggestions: Working with an inefficient manager creates lot of problems. The real problem is corruption, misuse of funds and vested interest. It needs good governance which comes from participation of public, shareholders and their decision making, from planning to implementation. There are certain questions aroused in the minds of company insiders and outsiders. Our intention is to bring some awareness among general public who are under wrong impression that, directors, CEOs and other executives are held responsible for the above mentioned problems, allegations, grievances, offences and liabilities created by external and internal people. A concept of ethical code of conduct, avoidance of economic irregularities, global competition, avoiding third party involvement in between shareholder and directors of the company are some of the factors helps us to regain our investments which has been shown in a tabular form.
Let us not have an assumption that earnings retained are always used for growth of organizations.
Page 10 of 15
Additional information Sl.No Company Particulars 2013 Cr Rs 2012 Cr Rs 2011 Cr Rs 2010 Cr Rs 2009 Cr Rs CEO Pay package (Cr)Rs 1 Jindal steel Reported net profit 1,492.45 2,100.45 2,544.10 1,444.68 1,554.23 69.76 Cr. PA
2 Equity Dividend 146.51 139.25 130.23 126.32 85.33 3 Book Value (Rs) 131.18 111.12 83.21 82.25 385.26
4 Net worth 13,540.18 11,940.54 9,799.53 6,874.01 5,351.22
6 Average earnings Return on common shareholders equity ratio % 11.71 19.32 15.25 17.32 --
Based on the above data there may be an increase in dividend pay-out ratio and corresponding ROI decreasing. Means company is willing to pay more dividends in 2014. Doesnt mean that low pay-out ratio is an indication for low rate of dividends. A low ratio is an indication that company is retaining earnings for future growth. But at the same time shareholders should find out the reasons for low rate of dividends are paid by the company. Performance through earnings means profitability. In the above table return on common shareholders equity decreased in 2013 when compared to 2012. During growth it is difficult for any company for high return. 2 Rs in crores Sl.No Company Particulars 2013 2012 2011 2010 2009 CEO pay package 1 Sun Net work Reported Net Profit 683.34 694.65 772.22 567.38 437.11 37.08 Cr 2 Equity Dividend 374.39 374.38 344.82 295.56 98.52 3 Equity Dividend (%) 190.00 190.00 175.00 150.00 50.00 4 Book Value (Rs) 73.41 67.12 60.54 51.13 45.49 5 Net worth 2,892.85 2,645.24 2,385.71 2,015.01 1,792.51 6 Dividends pay-out ratio 54.79 53.89 44.65 52.09 22.54 7 Average earnings Return on common shareholders equity ratio 24.68 27.62 35.10 29.80
3 Rs in Crores Sl.No Company Particulars 2013 2012 2011 2010 2009 CEO pay package 1 Apollo Tyres Reported Net Profit 312.53 181.33 198.25 414.99 108.12 48.19 Crores 2 Equity Dividend 25.20 25.20 25.20 37.80 22.68 3 Equity Dividend (%) 50.00 50.00 50.00 75.00 45.00 4 Book Value (Rs) 46.24 40.56 37.55 34.19 26.84 5 Net worth 2,341.43 2,047.60 1,895.56 1,726.60 1,355.71 6 Dividends pay-out ratio% 8.06 13.90 12.71 9.11 20.98
7 Average earnings Return on common shareholders equity ratio% 14.24 9.20 10.95 26.92
2013 data indicates low rate of pay -out ratio means that the company is retaining its earnings. But during 2012 pay- out ratio is more than the ROI means company declared more dividends.
4 Book Value (Rs) 250.70 214.83 148.03 173.52 190.33 5 Net worth 5,006.24 4,289.83 2,956.06 3,465.02 3,800.75 6 Dividend pay- out ratio% 56.56 37.79 108.76 98.42 31.16
7 Average Earnings Return on common shareholders equity ratio% 45.57 65.64 60.05 35.28
During 2013 pay- out ratio is more than the ROI means company declared more dividends. During 2012 ROI is more than the pay-out ratio means company has retained earnings for growth purposes. During 2011 and 2010 company declared dividends more than the ROI. So we can expect high pay -out ratio during 2014 and 2015. 5 Rs in crores Sl.No Company Particulars 2013 2012 2011 2010 2009 CEO pay 1 Cadila Health care Reported Net Profit 498.60 657.50 610.40 503.30 265.90 28.63 Cr. PA 2 Equity Dividend 153.60 153.60 128.00 102.40 61.40
Conclusion Trusting is most important factor for the growth and development of the company. A healthy person can earn and work for the accomplishment of organizational objectives. A positive thinker can maintain good health. As long as he or she is healthy, this leads to increase in wealth. Such increase in wealth motivates workers/employees/executives/individuals/job seekers towards positive thinking. Positive thinking is always good for health. Positive thinking is one of the ethical factors. So ethical behaviour is must for long term prosperity of a company. Trusting each other (employer and employee) is important and another ethical factor.
Page 15 of 15
References: Aswathappa K,Organizational Behaviour, Tata Mc Graw hill Publications, 2005 A.N. Agarwal Advanced Financial Management, Franklin G. Moore, 1 st edition ,Management, Chapter 1 and 2, Pages 1-40,Harper and Row Publishers, 1964 I M Pandey, Financial Management. Pulapa Subba Rao, IHRM,Excel Publishers, 2010, Peter F Drucker Management Paul Kimmel,Jerry Weygandt,Donald Kieso,5 th edition, Financial Accounting, Tools for Business Decision Making, Chapter 11, Measuring Corporate Performance, pages,572-576 Wiley India, Reprint 2010 Prasanna Chandra, Investment Analysis Portfolio Management, Tata Mc.Graw Hill Publishers,Pages 13.3-13.36 4 th edition Rustom Davar, The management process, pages 366-520 S.P Gupta. Statistical Methods, 39 th revised edition, Sultan Chand Publications, Pages 572-660 S.N. Maheswari 2nd edition, Financial Management, Sultan Chand Publications, Page A,37 ,1992 Web sites: Google.com Moneycontrol.com Salaries.com Magazine: Business India News Papers The Hindu Times of India
Corporate Governance is the Process and Structure Used to Direct and Manage the Business and Affairs of the Company Towards Enhancing Business Prosperity and Corporate Accountability With the Ultimate Objective of Realizing
The Merger & Acquisition Leader's Playbook: A Practical Guide to Integrating Organizations, Executing Strategy, and Driving New Growth after M&A or Private Equity Deals
Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance Without Venture Capital (Capital Productivity, Business Start Up, Entrepreneurship, Financial Accounting)